I recently met a manager considering a secondary sale before raising their next fund.
The goal wasn't liquidity. The goal was DPI. Which raises an interesting question:
How should GPs think about secondaries heading into a fundraise?
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Users praise GPs using secondaries to generate early DPI, sharing personal successes with cash returns from secondaries and M&A before starting new fund conversations.
Most GPs assume LPs want maximum upside.
Many LPs actually want evidence.
A realized dollar often carries more weight than an unrealized markup.
Especially after the last few years.
good fund managers don’t use #secondaries [only] for #liquidity or #DPI to raise their next fund — fundamentally they are part of their overall VC portfolio mgmt strategy.
cc @iPaulLee @PracticalVC
I recently met a manager considering a secondary sale before raising their next fund.
The goal wasn't liquidity. The goal was DPI. Which raises an interesting question:
How should GPs think about secondaries heading into a fundraise?
🧵⬇️
The best managers I've seen don't think about secondaries as a fundraising tactic.
They think about them as portfolio management.
The fundraising benefit is a byproduct.
Not the objective.
This is why secondaries have become more common.
A GP sells a portion of a winner.
LPs receive cash.
DPI improves.
The next fundraising conversation changes.
But every secondary creates a tradeoff.
Every dollar sold today is a dollar that can't compound tomorrow.
The best company in your portfolio is often the last company you should want to sell.
So what's reasonable?
Personally, I'd rarely sell less than 10% of a position.
Too little to matter.
I'd also be hesitant to sell more than 25%.
At some point LPs start asking: "If this is your best company, why are you selling so much?"
The same applies to price.
Selling at a small discount (<20%) to the latest round is one thing.
Selling at a 50% discount is a very different signal.
LPs don't just evaluate the DPI. They evaluate how it was created.
I think LPs generally ask three questions:
•Is this creating liquidity? •Is this creating credibility? •Or is this masking a weak portfolio?
Same transaction.
Very different implications.
@iPaulLee This is a great thread.
I generated 2 cash DPIs from Fund I (1 secondary + 1 M&A) before even beginning Fund II convos. Makes a world of difference to how the pitch is received.
One hot take:
At certain points in a firm's lifecycle, converting a small portion of TVPI into DPI may create more long-term franchise value than maximizing every last dollar of upside in a single position.
Reasonable people can disagree.
That's what makes it an interesting decision.
In my case, I always get pushback on how exits will be created and repatriated out of India to the US**.
I demonstrated a full cash exit & repatriation via a fully domestic M&A from India in Fund I. Now that I have data, it makes it so much easier to take this question head-on as an emerging manager.
**On a separate note, I always get amused by this question. People forget that US VCs & PEs with offshore vehicles have repatriated billions of dollars back to international LPs over the last 2 decades. India tech isn't a banana-republic ecosystem.
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